Industrial Mixed-Use Redevelopment

I remember back in 2007 when "mixed use hotel" projects invariably assumed four or five-star accommodations and luxury residential units with high-end retail amenities and maybe some class-A office space. At the time, I wondered how many such projects the world really needs (not to mention, I was feeling a little left out, given that I needed projects befitting a more practical limited service hotel and a lower cost basis). But it was clear that the craziness of the times made people want for something glitzy and glamorous, with a high dollar development cost that justified all the "juice" on the projects and all the financing that was flying around. I get it, I really do.

Now I'm hoping that all the doom and gloom of the last few years makes people receptive to a more blue-collar notion. Maybe we won't see a Ritz Carlton on every corner, but a few limited service hotels, convenience stores, and other such amenities can be good too, right? I mean, especially if it's an all-in community redevelopment project that really works for the surrounding area.

While Brooklyn's hipster artisan scene somehow gentrifies all that was previously nitty-gritty about that now trendy borough of NYC, there are plenty of other areas with an interesting story to tell, and I think those too deserve similar treatment -- even if not on the same scale of coolness. One such place is Detroit, where interesting things are already happening. Another is much closer to home for me and more typical to my region, in the mostly rural-turned-suburban villages of Phoenix, AZ, known as Laveen and South Mountain.

Here's a recent blog post from my Laveen blog: Laveen-SoMo Motor City. Please let me know what you think, as I really hope this catches on but I'm always open to criticism. 

May 2011: The Turning Point for Smart Growth (Or Commercial Real Estate's Emergence from an Existential Crisis)

Not that I have much faith that this blog post's title will prove true, but this month marks a crucial time for the commercial real estate community, particularly in the Western states where a couple of huge conferences are slated for this week and next. I sincerely hope that the more innovative ideas presented at each event are better heeded than in past years, as the last fiscal year also marks a more pronounced return to viability and growth for the sector, but we shall see.

As I type this, attendees of the Urban Land Institute's Real Estate Summit at the Spring Council Forum are boarding planes for Phoenix and preparing for three full days of discussions about smart urban planning. According to the event website, more than 2,700 attendees have already registered (about 90% from out of state), and there will probably be more than a few local gate crashers like myself. Judging from the list of events and keynote speakers, it appears that this conference will focus largely on public-private partnerships, changing demographics, and the current state of capital and real estate markets. This is a broad swath of subject matter, with only one specific mention of "the challenges facing cities as they witness the demise of the suburban ring" in one of Friday's sessions. I suspect that others will touch on the topic as well, but with greater emphasis on topicality and immediate returns for investors. Like all industry groups, ULI must answer its membership's question of "What can you do for me right now?"

When the ULI conference closes on Friday, many will head straight to Las Vegas for the International Council of Shopping Centers' annual mega retail convention, RECon, which officially begins on Saturday (although most people fly in Sunday night or Monday). In past years, this event has ranged from an insane bacchanalia with a flurry of deals to a more somber drunkfest of desperate moping and hoping for signs of life. To illustrate my point, consider that 2007's conference was marked by a ridiculous all out blitz by Dubai World and wildly expensive and exciting parties hosted by each of the major finance companies, whereas 2009 brought us more modest parties hosted by financiers and a lot of cozy cocktail hours hosted by various commercial brokers; 2010 was much the same as 2009.

Nearly every major national retailer and developer must show up at RECon, as well as anyone else wanting a piece of the pie. The frenzy of professionals flocking to Vegas culminates in an almost overwhelmingly large sea of hungry networkers toting stacks of business cards and brochures from one over-the-top booth to the next, as well as a number of back room deals and dinner business meetings. This year, there seems to be a renewed emphasis on educational events geared specifically toward the agent/broker or retailer communities, although there will also be several workshops and plenary sessions focusing on issues like sustainability and revitalization. The driving force for addressing these topics, however, is pragmatism and expediency in making deals rather than providing vision for the future.

The commercial real estate industry's lack of vision is disappointing, since the real estate sector as a whole faces an existential crisis at present (or perhaps it's emerging from one). But I worry about whether industry leaders have properly balanced the appropriate recovery mechanisms to fully emerge from this crisis. According to Norwegian philosopher Peter Wessel Zapffe's essay "The Last Messiah," there are four basic protections or remedies for a paradoxical dilemma such as this one:

•  Isolation -- "a fully arbitrary dismissal from consciousness of all disturbing and destructive thought and feeling" [I'd say the real estate industry's collective ego does well enough to avoid thinking of the negative, having even adopted a sort of positivity mantra.]
• Anchoring -- "characterised as a fixation of points within, or construction of walls around, the liquid fray of consciousness. Though typically unconscious, it may also be fully conscious (one 'adopts a goal')." [Again, I'd say we're mostly good here. See 'workaholic' and strong sense of ideology, the latter being more in keeping with the general provisions of anchoring.]
• Distraction -- "One limits attention to the critical bounds by constantly enthralling it with impressions." [Here we can thank the ego-pleasing nature of buildings, in keeping with Zapffe's proscription that distraction is "'high society's' tactic for living." This is especially true of landmarks and other highly creative developments.]
• Sublimation -- "a matter of transformation rather than repression. Through stylistic or artistic gifts can the very pain of living at times be converted into valuable experiences. Positive impulses engage the evil and put it to their own ends, fastening onto its pictorial, dramatic, heroic, lyric or even comic aspects." [This one, while periodically present in the field of commercial real estate, is all too often lacking. This shall be our focus going forward.]

As you can see from the above synopsis of Zapffe's remedies for an otherwise destructive "life-panic," they appear to take on a progressive or hierarchical nature. Sublimation, for instance, is both the rarest and most advanced means of protection afforded to humankind. In illustrating the meaning and importance of sublimation, Zapffe states:

"Unless the worst sting of suffering is blunted by other means, or denied control of the mind, such utilisation is unlikely, however. [my emphasis] (Image: The mountaineer does not enjoy his view of the abyss while choking with vertigo; only when this feeling is more or less overcome does he enjoy it- anchored.) To write a tragedy, one must to some extent free oneself from -- betray -- the very feeling of tragedy and regard it from an outer, e.g. aesthetic, point of view. Here is, by the way, an opportunity for the wildest round-dancing through ever higher ironic levels, into a most embarrassing circulus vitiosus. Here one can chase one's ego across numerous habitats, enjoying the capacity of the various layers of consciousness to dispel one another."

Precisely because most of the survivors in commercial real estate have had their "suffering blunted by other means," I worry that the industry cannot transcend to this stage of higher existence. The voice of stewardship -- both in our financial markets and land use -- will continue to ring loud and clear. Many great thought leaders have already become intellectual celebrities in the aftermath of one of the US's greatest ever real estate market crashes (some, like noted economist Brad DeLong, are even featured or mentioned at the conferences described above). But their influence remains strongest in the academic world and their views are most often seen as slightly thought provoking rather than providing prescient guidance for industry practitioners.

The ULI, for instance, in reaching out to local academia, selected Arizona State University president Michael Crow as a keynote speaker at its Spring conference. Michael Crow has been credited with everything from reviving downtown Phoenix to making the city's light rail system a success (some even say he conceived of or implemented the light rail itself). Sounds impressive! But really, all Michael Crow needed to do was to show up and stick with a plan that was already in the works. This took courageous leadership, but not exactly the kind with which he is too often credited. His greatest contribution was to merge the Tempe and Phoenix campuses, which helped promote light rail use as well as to encourage residential and mixed-use development in downtown Phoenix and the oft-ignored "Discovery Triangle" corridors. But to be fair, Crow nearly blew up the deal for Phoenix's biomedical campus due to a naming controversy with the University of Arizona (I wish I was joking about this) and unnecessarily risked burning other bridges upon his arrival in town. He worked out the naming issue with UA, but eventually decided to pull ASU's support (and naming rights) anyhow for financial reasons, which ultimately worked out for the best. But let's be fair: the city and federal governments took a greater role in filling the financial void left by Crow's ASU withdrawal in order for UA to make the project a success, just as others pitched in to help ASU with its downtown campus.

Who else do I think would have been more deserving of a footnote speaker's slot at the conference? A few options come to mind rather easily. ASU recently launched its Institute for Sustainability, while UA boasts its respected Drachman Institute and Professor Gary Pivo's Responsible Property Investing Center (in conjunction with Harvard). Each could have likely added more to the discussion than Michael Crow, and each has far more to gain from positive industry attention.

After all, the ULI's theme this year is "Adapting for the Future," and the local flavor offered by way of "special interest tours" and "mobile workshops" focuses mostly on Phoenix's historical ingenuity in place making (Taliesin West, prehistoric irrigation canals, and tribal economic development, to name a few topics). I wish the group delved deeper into the underlying principles that engendered such impressive feats of engineering and enterprise, and I wish they carried this theme forward more aggressively in discussions about infrastructure and urban revitalization. But I worry that we'll remain stuck in dealmaking mode and demanding that ULI make us more profitable right now. We already know that this will be the case for RECon this year, but I have higher expectations for the Urban Land Institute.

Arizona's Immigration Problem Is Other States' Gain

Arizona has decided to seek a Supreme Court hearing on it's flawed SB 1070 law, which saddens me as a resident of the state. Utah took a much better position on immigration, accounting for its potential regional advantage by countering the vitriol in Arizona with a friendlier voice. Texas, too, has mostly played this one well. But Arizona has decided to double down on a flawed strategy instead of seeking better solutions and paving a way to prosperity for itself.


People on both sides of the immigration debate remain too partisan in general, and in a crazy tribalist or provincial sense of the word. Remember, we still haven't done much in the way of addressing the root problems and assigning costs versus benefits of the status quo versus any prospective solutions -- but there's already a lot of good info out there that could help guide policy decisions.

In 2007, the Congressional Budget Office completed a report that explains quite clearly why we've been lagging in coming up with a comprehensive modern solution for immigration. In its report, the CBO corroborated other evidence that immigration, both documented and undocumented, tends to create positive growth for the U.S. economy. Furthermore, undocumented immigration has not cost the federal government nearly as much as it has created in revenues through economic growth. But the report did indeed state that immigration creates a strain on state and local governments' budgets.

So if we're wondering why the Feds have failed to address concerns of states like ours, it boils down to economics and national priorities. The fact that our federal government has been dragging its feet doesn't invalidate Arizona's claim that immigration is costing the state more than its fair share, but I also can't understand why our state has been so sensational in its approach to the problem. We want something done to help AZ, right? Then let's make a deal.

My proposal is one more like what New York achieved in the 19th century by implementing a massive immigration processing center called Ellis Island (we all know Ellis Island, but many didn't realize that it was borne out of a vicious immigration debate like today's). There were certainly calls to limit immigration or institute a strong quota system (which came later) -- one could argue that immigration was even more burdensome on New York's local economy at the time than it is on border states now -- but the federal government also knew that our country needed the economic growth from immigration at the time. So they reached a compromise that brought many federal jobs to New York and New Jersey as well as easing the burden previously shouldered by New York City and the state of New York. Not only that, but the Ellis Island move also took away some of this new immigration activity from other states that were serving as major ports of entry at the time. Big win for New York in the 1800s, and I think something similar would be a major win for Arizona in the 21st century.

Why must we continue to bicker and give credence to deep seeds of hatred, when we can instead ask what's in this for us? Further restricting immigration or sticking with the status quo does nothing to help Arizona. Creating a meaningful reform policy and embracing our geographical advantage as a major port for immigration could very well fix our current problems and provide much needed economic diversification and growth going forward. Where is this kind of solution in the mainstream debate?

Strike One for Lodging and Flash Sales

We've all seen the discussions about using flash sites. The best article I've found as a reference is this one, featuring hospitality journalist/blogger Adam Kirby. Still, I don't think the travel industry or any others should write off such flash sales entirely, as suggested by many. They should instead respect these deals for what they are and make good use of them as a marketing tool.

But to really understand how these flash sales work and how my industry can use such a promotional tool, I should try it out as a consumer, right? Of course! Thankfully, I received multiple opportunities in December 2010 and booked a couple that offered seriously deep discounts. They both offered plenty of time to book a reservation, so I was merely awaiting a change in weather and more free time to plan my trips, perhaps even as a combo since they were both in the same part of the state.

But all has not gone according to plan.... I received an email from groupon earlier today notifying me that my purchase from a dude ranch in southeastern AZ would be refunded due to a problem with the deal. From reading the discussion page on groupon's site, I gathered that they had overbooked the ranch and were immediately getting rid of the offer.... "sorry for any inconvenience."

As a hospitality industry professional and experienced traveler/yelper, I can't help but be critical of the ranch's handling of this situation. There's already been a great deal of controversy within the hospitality industry about utilizing flash sales like Groupon (and a weak consensus thinks it's always a bad idea). But these guys decided to do it anyway, offering an amazing discount and making too many groupons available, which resulted in the ranch being overwhelmed. Not good, but it's an understandable mistake and groupon deserves part of the blame for not foreseeing this eventuality. Now it's time to make things right.

If they want happy customers, the dude ranch should clearly explain what happened and offer customers a choice. I know that I was pleased enough with the deal that I'd opt for a rain check; others may want to cancel, in which case perhaps they should also receive a peace offering like a percent-off future stay coupon. In this case, we would all at least know what's happening and have some say in how we can each be made whole by the ranch's mistake -- we might even sympathize and become more loyal followers of the business.

Instead, I predict much resentment for this dude ranch as a result of the "sorry, but here's your money back," email. Many, like me, were probably trying a dude ranch for the first time and could indeed become repeat customers, especially given the proximity of this one. It is somewhat isolated, but near a single major feeder market (and not too far from a couple others), so I'd argue that the flash sale might have prompted a desirable outcome for the ranch. I somewhat doubt that this will now be the case. Bummer. Next!

Tucson Convention Center Hotel

As I digest the news that the Tucson City Council has definitively voted down the TCC deal for now, I realized that there was this fairly thoughtful email (if I do say so myself) that I wrote to a friend on the city council on the subject, dated April 2006.  Almost everything I said back then would still apply today, except that they already did try to scale the project down slightly and obviously the credit markets are a tad different now.....

...Yesterday, we discussed the financial model and size of investment required for large commercial developments  Here's an interesting article stating that large, full-service hotels have a tough time getting off the ground: http://www.hotel-online.com/News/PR2007_2nd/Apr07_FinancingHotels.html

That said, several upscale brands have proven successful with 200-400 rooms, hence the popularity of these brands in the marketplace and the availability of easy financing and capital investment.  This option has been the immediate alternative suggestion from any developers to whom I've mentioned the Tucson plan for a 700-room convention center property.

Off the record, I think Tucson could win big by incentivizing one or two competing brands to build at the 200-400 room tier, along with encouraging the existing downtown hotel to renovate and pick up a decent flag, while still leaving some funds available for other related programs.  Here's a list of available brands the city may want to pursue, along with a viable mix:

*Hilton, 307 Rooms (based on converting Hotel Arizona)
*New full-service hotel, 350-400 Rooms (Sheraton, W, Crowne Plaza, Intercontinental, Wyndham, Radisson, Doubletree, Hyatt, Four Seasons, Renaissance, Embassy Suites)
*New upscale select service, 120-250 rooms each (Courtyard, Hilton Garden, Cambria, aloft, Indigo, Hyatt Place, etc)
*New upscale extended stay, 100-200 rooms each (Homewood, Staybridge, Residence Inn, Element)
*New midscale products to compete with dilapidated supply along I-10 corridor

...I would not easily dismiss a nice, newly constructed midscale or upscale select-service product, as these will only encourage bigger developers with incremental gains in achievable rates - a big issue in the Tucson market, due to a typically slow summer season and high amount of government business year-round. 

Judging by the most recent article in Saturday's Daily Star, other professionals agree that Tucson's hopes for the convention center hotel are unrealistic.  But an easily winning strategy may be to go after something like this:

307-room Hilton (conversion)
400-room Hyatt or Renaissance (or something unrelated to Hilton)
200-room upscale select-service property
150-room upscale extended-stay
200 rooms of midscale brands (2 properties...)
------------------------
=1,350 rooms of class-A branded hotels added to the downtown, and better market segmentation

Right now, Tucson is not hitting the radar for most of the brands, even though it's one of my top markets.  This should tell you something about the existing demand.  It is wonderful for midscale and marginally tempting for upscale hotels; although upscale hotel developers would prefer to build somewhere closer to existing upscale areas, surrounded by other upscale retail and dining, etc.  The only way to change that dynamic is to incentivize them, which the city already proposes, but do it better than in the existing plan.

Tucson could easily get more bang for its buck by setting its sites on easier targets.  A relatively small incentive could make for a very lucrative deal when you're looking at a $10-50 Million investment that already has a place in the market.  Let's consider someone building a $50-million hotel/mixed-use building, plus a $20 Million renovation of the existing hotel, plus a new $25 Million hotel, and a couple of $15 Million hotel projects.  By offering a small chunk to each of these developers, you not only build up more than the proposed number of rooms downtown, but you also start the ball rolling for other me-too developers.  Incentivizing a $130 Million hotel project that barely makes economic sense, if at all, is a far more expensive and unfeasible investment than dividing that investment into smaller chunks.  Also, you can limit the funds to encourage competition from owner/operators and franchise companies, rather than handing over one big lump sum to a project that might not be sustainable.

I don't even stand to gain from this proposition, but I felt strongly enough about it to put this lengthy email together.... I also can't imagine the city throwing so much money into something that doesn't even make as much economic sense as many of the less expensive alternatives.  FYI, if either plan moves forward, I stand to lose a great downtown site that will likely go up in value to the point that my clients won't want it.  But when the dust settles, at least a package deal means incremental growth, which tends to be very contagious and better for everyone involved. 

On Self-Cannibalization in Real Estate

I'm sure this view will draw the ire of many professional contacts, and I would mostly understand.... We are driven by the market and too often lack the power to make huge changes in "the way things are done."  But I also hope that you recognize the flaws in how things have been done in recent years -- and not just from an economic perspective, although perhaps reevaluating our typical investment strategies/perspectives could go a long way in making things better.  I'm speaking of course about the community impact of real estate, since these two components of our world are inextricably linked.

What happens when the economic life of an investment has expired?  What is one's responsibility to the community with regard to the grayish area of perceptions of blight, value, impact, etc.?  And finally, how does an all too typical 3-5, or even 10-year investment timeline impact the likelihood that we leave blight in our wake while moving on to create "greatness" or other "enhancements" and "community amenities?"  Is there a better investment strategy that also accomplishes more in the way of making our world better?  Thankfully, there are many leaders in the real estate, planning, and economic development communities finally asking these questions and applying the scientific method to our varied theories of how things ought to be done.  I plan to focus on these elements going forward, hopefully blogging more frequently than I have in the past with some thought provoking issues and their proposed solutions.

For now, I offer my follow-up comments on an article that appeared recently in the local newspaper, The Arizona Republic.  This article was posted by local business leaders seeking to take back greater control of Phoenix and frustrated that the retail landscape here is mostly undesirable to small businesses for one reason or another -- mostly due to not offering the kind of main street connectedness that they seek within the market, and yet local businesses should be the key to an economic recovery.  So without further ado:

If you've been in any area of Phoenix for a considerable amount of time, just reflect on how that area has evolved over its first two decades (or the last two if it's an older part of town). What too many in our real estate industry readily accept as a cyclical market is really just wasteful self-cannibalism in many cases.

Having grown up in South Tempe, I often think about all the office space and retail that was built on the edges of Awhatukee. Back in the 90s, this was one of the hot spots to be in the Phoenix area, but then the market "shifted." The reason for the shift? Ambitious new plans for Chandler Mall and the 101 corridor. The same thing has happened again and again throughout Phoenix, and we end up with dilapidated shells of buildings that serve little value unless, miraculously, the surrounding neighborhood gets "revitalized."

The failure of this formula is that our community often treats housing exactly the same way -- get into the neighborhood while it's new, sell high, and move on to the next booming area..... How's this working for us today? Is it maybe time for a change in how we treat our surrounding community and overall environment? I think so.

This issue has been on my mind quite a bit lately.  In fact, as I type this, I await the final word on a controversial zoning hearing for a downtown permit application to demolish an older Phoenix hotel.  One of my acquaintances appeared in this news story about the case and he has blogged extensively about it.  I too have engaged in many quite similar debates about prematurely laying older buildings to waste, or overbuilding a particular area in one way or another with little regard for the surrounding land uses, infrastructure, and/or community needs and wants.


As we throw around such massive amounts of money in the development industry, I feel that it's perhaps important to remember what it should mean to "invest."  We're dealing with a rather illiquid investment instrument here, after all.  So why not try to reap the greatest possible long-term rewards by directly serving the community and always gaining buy in from the local residents who will inevitably become customers, strategic partners, and even co-investors in a project?  I know several successful developers already employing this kind of strategy to their projects, but think the industry as a whole has a long way yet to go.

What Will Future Generations Contribute to Our Economic Development

The Kaiser Foundation recently published a not-so-surprising report about increased media consumption among 8-18 year old kids.  The KFF survey, as you probably expected, demonstrated that overall media consumption has risen significantly in this age group.  However, it's equally important to note that TV viewing remained fairly stable, as did book reading.  So while others reprint the study's findings and emphasize deterioration in grades among heavy media users, I'd like to go ahead with the alternative hypothesis that "The kids are alright" -- a line more or less straight from "Talkin' bout my [dad's] generation."

How is this relevant to us?  Well, for the same reason that other business-related media sources are discussing this topic: The kids are our future and they've got plenty of disposable income, family spending influence, and time on their hands (not to mention their potential future lifetime purchasing behavior, which is quite valuable to businesses catering to teens).  Duh!  Like, seriously, it's so lame I had to even point that out.  But then it's also important to me because, as you can quite clearly see in my last sentence, I am now part of the adult ruling class -- inept at capturing an even remotely passable tone of today's teen language -- and frankly, somewhat frightened about our lack of connection with teens today.  As I work with fellow community leaders an real estate professionals in my own neighborhood, it's become clear that we had better work with the kids who are often vandalizing private property and potentially threatening our local businesses, or else see our community deteriorate in the future.  To better work with them, of course, we need to better understand them and relinquish some of our perceived control (which is mostly futile anyway, in my opinion) -- in other words, genuinely try to collaborate.  This begins with learning to appreciate their worldview and how it may be different or similar to ours.

Furthermore, let's look at the ways they develop that worldview, via media consumption patterns and application to other aspects of their lives.

In our post-information age, we often like to think we've somehow progressed beyond the simple need to produce and present information as a means to advance our collective knowledge and innovation base -- yet this remains a critical focus in much of our lives.  The mere availability of information in a disorganized and uncontrolled environment arguably remains one of our biggest hurdles to effectively utilize media to enhance knowledge on a widespread basis. (Yes, media companies do indeed organize information, but typically as a sole means to meet their demand feedback loop, which often contributes to bias and closed-mindedness).

If increased media consumption is indeed acting more as a distraction or mindless escape to our youth (and their parents), then maybe we ought to focus more on enriching it to promote intellectual curiosity.  Why should a teen's grades begin to fail because he/she spends more time taking in media presentations?  I can't fathom why, twenty years into the information revolution, we haven't found a way to make learning more stimulating -- unless we have and we just don't realize it (see, for instance, the current dialog about how we are already using the all-new iPad and its promise for mobile computing).

The three questions we need to ask are:

1.  Are we evaluating the wrong measures of learning, by failing to account for positive aspects of increased media consumption;

2.  What ever happened to our once strong cultural respect for the venerable fourth estate (great post about financial coverage here) and the ongoing value of creativity expressed through contemporary art or, better yet, direct observations about pop culture; and

3.  Why are we highlighting the perils of media consumption, rather than focusing on opportunities present in this finding?  We should be taking notes on the popularity of interactive and multi-platform media in the commercial space, typically developed to either enrich private sponsors' marketing opportunities (i.e. click-throughs, surveys, etc.) or to enhance the value of an entertainment franchise (i.e. Star Wars, Lost, Avatar, Nine Inch Nails, and others using ARGs or similar).  What's wrong with using these examples to promote better parallel learning mechanisms?  (And yes, I know that some are doing this, but why not en masse?)

Just as when I was a student in the 80s/90s being told to beware outdated maps in the library, or assertions about scientific findings that were since disproved, kids today should be encouraged to forge their own learning paths to some extent.  From the top-down perspective, we could use closed captioning or voice-/ video-enhanced text at an early age to help with language acquisition.  This could then be paired with a bottom-up approach that enables students to seek ways in which they can explore related media (for fun or learning) or perhaps contribute their own interpretations through wikis and discussion boards.  Meanwhile, this could better train teens to seek contextual clues to the often dreaded classic literature, history, humanities, or boring science lessons -- which in turn better promotes the notion of democratized and engaged learning.

I'm a little disappointed that the study emphasizes the fact that parental media rationing is key to getting kids back on track.  Instead, what if parents and teachers did a better job of engaging with their kids in more enriched media consumption?  As a kid who grew up on the tail-end of gen X, I see the same perception wall that hindered communication about media consumption in the 80s, where it was too often viewed as a purely recreational activity in one's leisure time that crept into more productive activities.  This attitude contributed to a popular uproar over Ronald Reagan's observation that video games should be used to develop the skills necessary to our military -- how long did that view take to institutionalize, 20 years?  Or my parents' early lack of understanding about my music consumption habits, which helped create a passion that I leveraged into more critical interpretation of media -- I still benefit from this as an adult.  And would you really complain that a future environmental biologist or investment banker is glued to Discovery Channel or CNBC as a teenager?  What better time has there been to learn from available media, and at the same time teach kids to analyze and understand the source.

So this just looks to me like the saga continues between kids and their parents, who "just don't understand," as stated by one of my dad's favorite actors, Will Smith.  Hey, wait a minute, I thought he was one of us....

Latest Phoenix Home Sales Data -- March 2010

I can't help but be a nuisance when it comes to this kind of information: http://bit.ly/cU7dcm.  But seriously, the story could have been better reported.  And just in case the paper deletes my comment, here it is:

...Rather than seeing a detailed report that breaks out different price ranges, is it safe to assume the following:

Foreclosures are continuing to occur across the board with single-family homes and multifamily. This in turn disproportionately affects multifamily units, which almost always lag single-family homes in the greater Phoenix market. Add to this the fact that excess inventories are finally coming to market in the multifamily sector and it's a double whammy for condos/townhouses.

Meanwhile, stability in the employment market is bringing buyers back to the table, while at the same time having the unintended consequence of more short sales or strategic walk-away activity. Since the fringes of town already saw prices drop so significantly last year, they are now starting to stabilize. Thus, price volatility is going down in the burbs, but still not increasing like more established neighborhoods, as people simultaneously become more selective in terms of location. Thus, we can now all breathe a sigh of relief that the housing crisis is over, totally ignoring the fact that it's an asymmetrical "recovery."

And finally, how about the biggest elephant in the room, which is the federal tax incentive set to expire in April/June, combined with the end of the Fed's mortgage purchase program. It seems that there are plenty of reasons to lock in those purchases and mortgage rates now, rather than a few months from now, which means we'll probably see the same positive numbers for a couple of months. But what do 3Q and 4Q 2010 hold in store for us? I wouldn't be willing to bet on it.

Not at all factually based, but the article left us to guess what was going on...... How did I do? And if you really appreciate my perspective, then by all means, I invite you to check out my blog -- where I somewhat casually try to cover this kind of information: http://bit.ly/9YQJoe.

US Retail Property Gouged by Record Vacancies - CNBC

US Retail Property Gouged by Record Vacancies - CNBC

E&Y Says Distressed Acquisitions to Pick Up in 2011, Not 2010

I couldn't have said it better myself, although I will admit that in the last year and a half I thought that we would see an uptick in distressed buying by 3Q of 2010.

An important note on this activity is that, to date, many deals are still happening off-market and debt is slowly trickling back into play -- at least that's been my observation.  What are you seeing for the market?  Will transactions rise to any significant level in 2010, or are investors still waiting?  My guess is that it depends on the market, where truly undervalued deals in locations with high barriers to entry are already transacting again.  But 2011 fits my estimate of increased buying in speculatively developed suburban markets that are finally seeing their fundamentals stabilize.

Here's the Globe Street article:

Home Ownership and Community Wealth

Felix Salmon wrote an excellent post on Reuters today, regarding the rationale for a sustained bear market in housing and common public misgivings about home ownership:

http://bit.ly/buWCHt -- That's what I'm talking about, except to say that an increased rate of home ownership is detrimental to the economy, per se.  It all depends on how you prioritize different economic factors.  If you value productivity above all else, then a more mobile workforce is certainly better in our economy -- but this doesn't seem to matter nearly as much to most communities as it does to the ones where business is centered.

I'd also like to add that for many people, the anchoring effect of ownership is comforting when, in fact, we are taking ownership of our property rather than merely paying endless debt.   One question that I would add to the research is how many people realistically plan/want to stay where they are.  Not only can ownership help provide financial security for the individual home owner, but it can create stability in the regional market.  The latter effect is negated when people choose to move every 5-7 years, but perhaps that trend will also abate in the near future.  Thoughts?

Krugman, Palin, and the Real America

In Paul Krugman's recent post to his NY Times blog, he decided to take Sarah Palin's bait and react to her disparaging remark about the eastern U.S.  Following is my response, which I hate to admit serves to explain much of the Tea Party sentiment being embraced in the west.  Where I diverge from the Tea Partiers, however, is that I propose a different response (not to mention a very different outlook on most issues).

While I can't declare hatred against any region, I think that people in most of the western states should indeed take greater ownership of their states' economies and resources, rather than continuing to operate through the old guard on Wall Street.  Here's why I think we should become a little feistier and provincial out in Palin's "Real America:" We need to wean ourselves off of our absentee landlords.

So rather than snapping back at Palin for her crude lashing, I hope I can convince you to consider that our present economic situation (and commensurate rise in so-called populism) has several parallels to the outcomes of past eras marked by significant growth in the western U.S. -- most notably in the late 1800s (see "People's Party").

As a resident of Arizona, it's tough to ignore how the housing bubble was essentially the greatest transfer of wealth in my lifetime here -- in the end, most benefiting the bankers who facilitated the mortgage transactions, and with the most heinous acts (or lack thereof, i.e. oversight) occurring behind the scenes in our nation's banking capital far away from here.  From about 2003-2006, many homeowners foolishly bought into and helped contribute to the rapidly escalating housing bubble, thus trapping themselves into an unreasonable personal debt situation without any contingency plans for when the market abated or crashed (and now even being convinced by the banks that walking away from their overpriced mortgages is immoral, despite having legal protections to do so).  We generally acted like pawns who were convinced to ignore common sense and our own self interest, while charlatans took payments for services rendered and then turned around to the broker dealer community to unload much of the underlying investments on "qualified investors."  In this sense, there were two primary demographic groups most impacted: the young adults who traditionally enter the housing market at whatever time in life society deems them as having "arrived;" and then their grandparents who once had a nice nest egg in their pension plans or advisor-assisted/controlled accounts, until they or their fund administrators were convinced to invest in MBS assets.

[Note: The foreclosure crisis will likely continue, according to this article: http://bit.ly/cs1Lof]

Then there's the commercial real estate sector, where many developers ran into their own bubbles, whether in retail, hospitality, office space, or some sort of commercial mixed-use concept.  Ultimately, rental rates skyrocketed to a point that small local businesses could no longer afford to expand (or else, they too ended up biting off more than they could chew), regional banks collapsed (or at least some of those remaining after the S&L crisis did), and national retail chains pulled back on their expansion plans before getting into too much trouble -- thus helping to accelerate the decline of speculatively developed small retail projects, which were a favorite of smaller regional development companies.

Now that the market has crashed and it has become a buyer's/renter's market again, debt and capital investment sources are scarce and employment opportunities have systematically declined in Arizona (yes, thanks largely to a non-diversified economy and uneducated workforce).  The often overlooked entrepreneurs who start up little sandwich shops or dry cleaners can no longer borrow against their homes as was the norm, and accomplished professionals of the baby boom generation who might venture out on their own lack the resources and market opportunities to justify the risk.

[Note: This article provides industry-specific numbers for job loss: http://huff.to/9UTP2n]

So we now have an entire population that feels victimized and powerless.  Worse yet, most people paying attention will observe that, without drastic changes to business as usual, the ones most likely to get in on the ground floor of an economic recovery are again the established elite.  This means that some form of social unrest should have been highly anticipated (as called for by Ravi Batra in The New Golden Age).

[Note: McCain doesn't appear genuinely interested in helping his constituents, and he's beginning to attract greater attention from national press for his lack of sincerity: http://bit.ly/aWNnZ6]

While I can't vouch for 100% accuracy of the above analysis, I will say that watching the scenario unfold in historically independent yet transient and growing Arizona is very interesting.  My affluent and educated gen X/Y cohorts see entrepreneurial opportunities all around them, while others view the world through a lens of outrage and seek a place to direct it.  But our best bet is for the two sides to agree on the most pragmatic and proactive idea, which fundamentally boils down to "hey, let's avoid this sort of calamity in the future."

This means investing in a sustainable local economy by supporting local businesses over national chains, thus helping prove the concept and push more money through our local economies.  It means balancing our state/municipal budgets while still investing in long-term growth and education programs to ensure an educated workforce and future economic opportunities. It means economic diversification, better planning, value engineering, etc.

It's a lot of hard work to fix what's broken; Palin's approach seems so much easier.

Seriously? Still Talking Trash about the Phoenix Housing Market? Get Over It Already.

That's right.  I'm about to slam someone for spreading news about doom and gloom for the Phoenix market....  It just seems so 2008.  Meanwhile, in 2010, we have the power of good information and can take pleasure in the art of nuance and differentiation.

Here's the article, which gets it all wrong, in my opinion, with NY-based writers relying on an unnamed real estate professional from the Phoenix market.  Unfortunately, this "professional" does not know how to look up any of the available data sets about his market.  For if he did, he might choose to highlight the Phoenix area's lopsided housing prices, consumer spending, debt levels, employment information, retail trends, and other vital statistics for our vast metro area.

But he does have one thing right, which is that it's not as easy any more bringing in wealthy Canadian retirees and convincing them to speculate on high priced winter homes anywhere in the sunny burbs that an incompetent agent wants to sell them.  Beyond that silver lining, this guy's viewpoint illustrates little more than his own ignorance and self-defeat, since I'm sure that he once was the mortgage broker who could never say no.

He says there is no recovery.  In fact, the recovery/non-recovery in Phoenix is very uneven, favoring more established and unique neighborhoods with jobs/services nearby, while it remains far out of reach for others....  And if this guy thinks that the distant suburbs' fundamentals support a rise in prices to where they were before our housing ponzi scheme fell apart, then he's an absolute idiot (and I think this is the first time I've resorted to name calling -- but I had to, since he's unnamed).  That said, it's interesting to see that builders are in fact returning to some "infill growth areas," as I call them, like in where I live in Laveen; but as a side note to a tangent, the only ones I see building tracts are the national companies, which are probably operating at a short-term loss.

Here's the simple problem: New houses were severely oversupplied in the Phoenix market in the last 5-7 years, as home ownership rates rose within the existing population (meaning that more traditional renters suddenly could buy instead) and amongst newcomers (they practically received houses when they stepped off the plane, like receiving leis in Hawaii).   To make matters more perilous, virtually no one had any skin in the game because of the drunken sailors who sold and underwrote their mortgages.  Meanwhile, the economy remained almost entirely tied to our real estate industry, so that when jobs started evaporating from the market like dew drops in July, many nice new neighborhoods quickly became more like ghettos.  Some people left the state/country in search of better opportunities and others just stayed and floundered.  Still others are doing just fine, as always -- and this is the silent majority, by the way.

Not to mention, the people who "live" in many of those neighborhoods worst affected and on the outskirts don't really live there at all, except to sleep at night, and so the smart ones are leaving.  Think about it: what if you put $10,000 down on a McMansion in Queen Creek, Apache Junction, Maricopa, Suprise, or Buckeye, and then paid between $1,500 and $3,000 per month on it for the last five years, maybe even experiencing a huge spike in your monthly payment in the last year or two.....  Now jump forward to today, when you owe nearly double the market value of that house, you've hardly invested any of your own money into it, and your neighborhood is crumbling all around you.... Top it all off with the fact that market rents are cheap, and I mean really cheap, and you're legally protected against deficiency if you hand your keys to the bank and walk away.  What would you do?  Rent the identical floor plan across the street for half what you're paying?  Move closer to your job, if you still have one?

The answer is or at least should be simple to many people in such an extreme situation, as I've previously written here. This also accounts for our much discussed surplus housing inventory and empty strip malls, shopping centers, and offices.  They are generally located in suburbs outside of the city core -- especially in the boom towns of 2005-2006.  Meanwhile, the historic urban cores of Phoenix and Tempe are showing great signs of renewed vitality that hadn't been seen in 30+ years prior to now, and other areas are adjusting to a new normal or moving forward with long-delayed infrastructure plans and maybe even adding services.

So you tell me.  Do we really stand to gain any more by discussing the downturn at this point?  It seems to me that we should instead be carefully studying the fundamentals of specific markets and preparing for their recovery or re-characterization, whichever is most realistic and appropriate for a given area.  Those that can offer a more compelling reason that people should stick it out and invest in their communities will weather these times well, while the places offering nothing but big cheap houses may now want to reconsider their strategy.  Just as this is true nationally, it is true within our market too -- just on a smaller level.

More on the Ethics of Strategic Defaults

There is presently a great conversation among commercial real estate professionals in a LinkedIn group to which I belong, questioning the honor of those who choose to walk away from bad mortgages.  Here's my two cents (note that I reference my previous blog post at the end of the comment):

...I'm sure you know that Arizona is an anti-deficiency state, particularly regarding "purchase money" loans for single-family dwellings on 2.5 acres or less ( http://www.azleg.state.az.us/ars/33/00814.htm ). This means that homeowners in Arizona who find themselves in a negative equity situation have the right to reevaluate their financial situation and consider turning over the real estate that secures the loan. In so doing, the homeowner makes the obligation whole and the bank cannot pursue any damages due to changes in the asset's value resulting solely from market conditions (in most cases). This has been the law in AZ since 1971, and it is the environment into which banks decided to invest their money during our latest bubble, even when making loans to very risky borrowers and failing to properly account for market risk.

On an individual basis, borrowers often feel guilty about exercising their legally granted right to walk away from a deed of trust secured debt for personal gain or preservation. This is largely due to the reasoning that you provided -- that it breaks down our system of trust that makes our debt-driven economy hum along. Or even more extreme, your comparison to wife-beating. But these premises are both wrong because they assume a falsely placed sense of morality as it relates to one's treatment of legal documents and investment agreements. In fact, while our society has a duty to be moral, our economy is fundamentally amoral, and economic transactions can only be as moral as the law declares they must be (where laws result from society's moral and ethical views).

If you believe that those laws need to be changed, then so be it. But also please recognize two related facts: 1) Bankruptcy protection laws have been significantly weakened in recent years, and the negative effects of bankruptcy are perhaps a tad extreme for many of the cases where homeowners should walk away; and 2) Bank notes are not the equivalent of handshake deals between two equal and trusting parties, which is why they must be loaded with lengthy descriptions of recourse and other contingencies. If you truly believe that we need to take greater measures to compel people to pay their debts, then I recommend that you take a step back in our legal history to the times before England's signing of the Magna Carta. Those were the days....

By the way, I've logged several other online discussions about the morality of walking away on my personal blog (not regularly updated). Feel free to take a look: http://bit.ly/aHyrcO .

Also, there's a discussion on ABC 15's website to which I couldn't help but contribute my personal views on the matter: http://bit.ly/ctMhHW:

This should not even be considered a moral versus immoral choice, but an amoral financial one. Arizona law provides for efficient breach of contract, which means that a party can breach a contract when that contract becomes an excessive financial burden. Further, Arizona is a non-recourse state: if your loan is collateralized by an asset, then that asset shall serve to make the debt whole in the case of a default. These rules were created with a moral compass in mind, for without them imagine how much the powerful could take advantage of the powerless and how the economy could stagnate by forcing people to honor bad contracts for their whole lives. But since when is it considered a moral choice to take advantage of legal protections that benefit us all....

 ...

 How do you decide to walk away (different than foreclosing, btw)? Easy! When your mortgage payment is double market rent and your house is valued at less than 75% of what you owe, then there's a pretty good case for pocketing the extra $12,000-25,000 per year that you are throwing at a poor investment. "But then I can't buy again for 2-3 years..." Lucky for you, there's still about five years of inventory on the market. "But what about my credit?" Keep all your cards and other accounts current, and it'll rebound in the next couple of years. Plus, with an extra $25,000 on hand, maybe you should consider paying cash for the next family car or big screen TV. "But what will my friends and family think?" They'll be jealous, even if they say otherwise, because it's the right choice. "But what about my neighbors?" If you walk away and leave an intact home to the market, you're doing better by them than if you fall into serious default involuntarily and they must watch you go into financial and personal ruin. If you can afford to buy again and have cosigners willing to help, then buy the place across the street and you've actually helped the market (and you would want to move across the street if you really care that much about the neighbors, right?). "So what's stopping me?" I don't know -- maybe you've bought into the banks' PR plan to guilt you into padding their pocket books rather than yours.

 ...

 For anyone questioning the decision to walk away, I would recommend that you seriously analyze your financial situation and the pros/cons of doing so, with the assistance of a financial calculator (or ask a friendly accountant, financial analyst, or upper division college business student for help). First, what are all your current monthly expenses related to the house you would consider leaving? There's your status quo.... Next, do you plan to rent or buy a new place (or rent, and then buy in a couple years)? If so, what is your initial investment, when will you make that investment, and what will your new expenses be? Here's the financial comparison you must consider..... And finally, why do you feel compelled to walk away? If it's purely for financial reasons, then you must consider the above calculations above all else. But if it's because of work opportunities or some other reason, then you will need to reconsider your priorities and consider the above calculations helpful references in helping to make that decision. (And if it's for a new job, you could even consider the changed income/expenses into the calculations pretty easily).

 ...

lender, thank you for the compliment [a mortgage lender, with the screen name"lender," thought my above comments summed up the situation well]. I would love to see a little more common sense on this topic and a little less of the emotional zeal that surrounds our rough housing market (and the supposedly negative impacts of one course of action versus another). If you resent the family down the street for "damaging your property values" by foreclosing, then you really need to reevaluate the situation and consider the fact that the damage was done years ago -- before anyone talked about walking away. It seems rather counterproductive to kick others while they're down, just as it is to fixate on having once made a costly decision for which you continue to pay. People should seek to make the best decision today, based on their current situation, and then move on. As soon as we the public can move toward rationality, the better our chances for an efficient recovery. 

Definition of Entrepreneur

I'm a firm believer that what the world needs now is a new entrepreneurial class, and particularly in these great western states where properties/resources are relatively cheap and out-of-work talent is plentiful.  If the debt markets thaw, or more young and knowledgeable individuals figure out a way to escape the debt trap that keeps them tied to their 9-5 jobs (and build the necessary savings to sustain several months or years without income), then there's never been a better time in recent decades to pursue this dream.

But what is an entrepreneur?  Ironically, I was asked this question on a recent online job application, where I offered the following definition in 150 words or less:

An entrepreneur is someone driven so strongly to create a successful business that they will risk the security of a traditional career to pursue that dream.  An entrepreneur values mistakes as the greatest learning opportunities, but only with an understanding that the difficult process leads to successful execution of the business plan, economic freedom, and hopefully great financial and experiential wealth.

It was a somewhat hurried response, primarily because this wasn't a job that I'm dying to get (I even offered a somewhat ego-driven and tepid response when asked why I would want to work for the company, because I'm not sure that I do, and recession be damned, I don't believe that talented people should sell themselves out at the first site of an opportunity).  But I felt comfortable enough to throw it out there as a mostly fitting definition and a great discussion starter.  What do you think an entrepreneur is?

Hotel Deals to Rise, Thanks to Lender Transactions

Here's a great article that I think will ring true in 2010.  And yes, I joined a crowd once in grumbling/booing at Mr. Reay's gloomy predictions for years of hardship to come in the hotel market.  Of course, it was not the news anyone wanted hear (even if we believed it), and I recognized that Mr. Reay was taking too much pleasure in accepting the new "gloom and doom" spokesperson role for the industry.  But the fact that others have been so slow to recognize and address the problems that led to so many distressed hotels and so few transactions means that Atlas Hospitality has rightfully earned its spot as the top-quoted group in trade articles about how stale the market had become.  So without further ado....

Advice to Homeowners: Walk Away

Regarding "strategic mortgage defaults:" Yes Yes Yes! These are a good solution to a big problem (and yes, I live in an area where we would see significant short-term repercussions, but that's okay). Here's a comment that I recently posted to a Motley Fool article, which featured outspoken UA professor Brent White (http://bit.ly/cazvPT):

As a college student, I spent multiple semesters compiling research on the economic value of bankruptcy. Most notably, the research pointed to the fact that allowing a financial reset button to investors has almost always helped spur future economic growth. In fact, it is usually the risk-takers who most help the market grow, and then it is the risk takers who most often require a bailout of sorts when hard times hit the economy.

Combine this with the knowledge that commercial investors are almost universally
considered unwise if they fail to renegotiate or default on expensive loans (and often have default clauses in their contracts to accommodate such decisions). Like those commercial loans, a home loan is a collateralized debt instrument -- and some states, like Arizona, wisely protect homeowners from undue recourse after the collateral has been converted to the lender's ownership. This means no risk to one's credit score for turning over the keys to a money trap. [Ummm, I think I covered this elsewhere, but please disregard my comment that there is no risk to your credit score.  That's not what I meant to write.]

So blame the banks. When they put forth 80-100% of the values that their misguided appraisers projected on bad investments, they made much poorer decisions than the homeowners who submitted the remainder. So from an both an economic and ethical perspective, why should we insist that there be a false moral obligation on the part of the downtrodden homeowner to help the bank that refuses to renegotiate a bad loan.

Read more of Professor White's argument about "efficient breach" and non-deficiency in last weekend's local paper: http://bit.ly/9CIHoK.

Follow-Up: I recently posted the following to azcentral's brief opinion piece on this subject (http://bit.ly/cEX05W), which I think helps to illuminate the many facets of this debate and my views on the subject.  And, by the way, the story's comments are some of the most intellectually stimulating that I have yet seen on azcentral.com.

@animadvert4: The harm is already being done on a massive scale, through unfortunate and often unavoidable mortgage defaults.  Good luck effectively pointing the finger at all the borrowers "causing" your diminished home value; better yet, good luck identifying a legitimate baseline appraisal for your home in an established neighborhood, where many homes sold for less than today's prices in not too distant memory. [Note: This commenter alleged that purposeful defaults constituted tort damage to neighboring homeowners.  While this is a compelling concept, it is a failing argument on many levels, certainly including the suggestion of recourse that I strongly doubt to be applicable in any practical sense.]

Another important note: Financial institutions constituted the single largest moneyed political lobby for the ten years that precipitated our burst real estate bubble (and this transcended political lines, although spending tended to favor Republicans who were in power).  This spending effected policy like Bush's poorly conceived home ownership plan as well as his misguided policy on student loans, Congress's bankruptcy "reform," and several other [policies] designed to increase the fees collected by banks in recent years.

Not only should the banks carry greater blame for this crisis than individual borrowers, but they should be credited with failing to understand the greater ramifications of their greed.  Or maybe a better question would be whether they did in fact misjudge the outcomes of this cycle.  While most of the large banks guaranteed themselves a federal backstop for their errors, they have also strategically built up a foundation for a very profitable recovery.

Why aren't we more concerned about the fact that the American public is guilted into taking the least advantageous path to financial salvation, when we regularly expect that more savvy corporate interests will do otherwise?  I'm quite grateful for provisions like the "efficient breach" law, which I consider tantamount to bankruptcy protection in its ability to provide efficient recovery for failed investors in a down economy.  While one could argue the potential that people will unjustly take advantage of such "clean slate" provisions like bankruptcy, research has consistently proven that this is not the case.  Instead, for every wave of debt forgiveness among individuals (like personal bankruptcy), there have been greater than proportionate increases in overall wealth, i.e. economic recovery. [While I can't readily cite sources, there is plenty of evidence that defends this position.  If not for a crashed hard drive a few years back, I'd be able to draw from sources used in my previously mentioned academic paper.  But if you so wish, I think you can find it in the UA library.]

Our economic system has historically seen the greatest benefit from rewarding risk takers, for they are the ones who most contribute to economic growth.  So why now are we seeing such a reversal of sentiment, now that our economy could most use such relief?

When Will This All Turn Around?

The pundits are all over the place, but it seems that there is some sort of optimistic consensus that the economy will start to look better by sometime next year. Kiplinger's has an index for such a prediction: http://kiplinger.com/businessresource/recovery. And while I think this is a great traditional (and thus conservative) tool for monitoring lagging indicators, I'd argue for a newer approach. Otherwise, we are completely discounting the fact that we may find a truly transformative path toward economic recovery.

I'm more interested in reevaluating our methodology in looking for leading indicators than measuring our lagging ones, in order to better reflect changing values. There was a great article on fool.com about the historical performance of large cap stocks (http://www.fool.com/retirement/general/2009/06/23/its-already-worse-than-the-depression.aspx). On the one hand, the article's observation begs the question of a bottom in the market--even though I predict another year of poor lagging results--but it also raises the possibility of a new kind of growth.

What if we the entrepreneurial class decide to overturn traditional economics by bringing forth an era of immense economic growth coupled with deleveraging. Not only do I believe that we need this for the long term, I also think it's possible with a short-term focus on old school yankee ingenuity. And I think that Gen X is uniquely capable to take on such an ambitious goal. What choice do we really have? More on this later.... including a tie-in to why this should especially concern those of us in the western U.S.

The Truth About Changing Hotel Revenue Models

Here's a great story from Michael Schindler, themed "Things I’d Prefer Not to Hear Anymore." In it, he discusses the whining that is all too prolific in our industry right now. Following is a reprint of my comment on his blog:

I feel the same way as Michael about our industry's currently sorry state. To his final point in this story about being a cheerleader, I would take his comments a little further to the acerbic side by saying "shut up and work through the tough times." Our industry is reeling right now from an era of all talk and cheap money. This meant that no one had to do much in the last few years aside from managing their time to process all the business transactions. Now, deals are tough to come by--as they should be in an efficient market (where efficiency is tied to parity on upward and downward forces in the economy). We should each focus on succeeding rather than pegging the date that the market makes it okay to do so again. That means working with what we've got.

Also, I often wonder why hotels aren't getting more creative in their reaction to the once again dynamic nature of our business. I have made a couple of recent trips to Las Vegas, where I frequently gamble at MGM properties in my spare time (low dollar amounts, I promise). While I regularly receive deals for $49 or $69 room nights, which are far below "acceptable rates," I know that these are offered at huge discounts to their simultaneously advertised rates. Thus, the hotel is using a classic marketing strategy to segment pricing based on overall customer value. Some people are indeed paying $200 per night, while I'm only paying $50; also, I'm making up for my room discount by dining out, attending shows, and gambling. A good marketing analyst is likely tracking these numbers to ensure that their strategy is working.

While this financial model is different from the limited service world where I operate, it's really not too different in its approach to the market. Hotel operators need to leverage their relationships with revenue sources and influencers to look for opportunities for quality promotions. Here in sunny Arizona, for instance, I would consider tapping into the cheap rates at golf courses and other currently struggling businesses to promote stay-and-play packages. Given all of the automated marketing and property management tools available, it doesn't take too much effort to try. And if you fail in one area (or marginally succeed), then simply move on to another idea. Remeber, if you fail to capitalize on such opportunities, I bet that the bigger players (Hotwire, Priceline, etc.) will happily do this with or without you.

In a nutshell....

I think this pretty well describes the world we've been in for the last year or so. Great stuff. The sad part is that when everyone goes through the motions, deals tend to get done. Now things are changing so that you have to put up the money in order to demonstrate the justification for everyone doing the work.